More Equity Must Be Put Into Tax Reform Package

UPON PASSAGE of the U.S. Senate`s tax reform bill, President Ronald Reagan declared, ``. . . the score is: taxpayers 1, special interests 0. The Cinderella team came out on top.``

If that is true, the middle class should be prepared to pay for Cinderalla`s ball gown, because both House and Senate tax overhaul measures do not evenly distribute the benefits of tax reform.

Both Rep. Dan Rostenkowski, D-Ill., chairman of the House Ways and Means Committee and Senate Majority Leader Robert Dole, R-Kan., have promised that equal treatment for the middle class will be the top agenda item for the conference committee that will iron out the final tax reform proposal.

And well it should be, because neither bill provides a sufficient degree of equity for all taxpayers. As such, both proposals represent an unacceptable assault upon the widely held belief that taxpayers should contribute to the government according to their means.

Under the Senate proposal, the taxpayer earning between $30,000 and $40,000 would realize a 0.4 percent increase in his or her after-tax income, while a person earning $200,000 and more would realize a 1.4 percent after-tax benefit. The House proposal assigns a 1 percent after-tax benefit to persons earning between $20,000 and $40,000 and a 1.9 percent benefit to persons earning $200,000 or more.

Working out these inequities inevitably will lead the conference committee to resolve the difference between the House`s four income tax brackets of 15, 25, 35 and 38 percent and the Senate`s two brackets of 15 and 27 percent. Compromise, however, already is assured by the semantics of the Senate plan.

While the Senate ostensibly has called for a two-bracket system, it really has recommended a three-bracket system. After the 15 and 27 percent brackets, which are applied in increments, a third group of taxpayers (single earners with more than $87,000 annual income and couples with joint incomes above about $145,000) would pay the 27 percent rate on all their taxable income -- the rough equivalent of a 32 percent tax rate.

Then, too, the conference committee must try to bridge a huge gap on individual retirement accounts, another program popular with the middle class. The Senate proposes doing away with the tax advantages of IRAs, except for persons who have no other private pension plan, while the House would keep the current IRA law but restrict IRA contributions in proportion to employee contributions made to employer-sponsored 401(k) plans.

The House IRA proposal is far more equitable, since it allows every employee to take individual responsibility for planning and saving for retirement. The Senate proposal would, in effect, penalize those who work for companies that have not set up 401(k) plans.

Still, the House proposal allows employees to reap greater financial benefits ($7,000 a year in tax-deferred income) through 401(k) plans vs. the IRA option ($2,000 a year in tax deferred income). Conferees should explore bringing greater equity to the two plans.

The Senate bill also includes a nonsensical time delay in the new tax rates that would mean an increase in 1987 taxes for many taxpayers. Restrictions on most tax preferences would go into effect Jan. 1, but the reduction in tax rates would not go into effect until July 1. The message is that tax reform may be in the future, but Congress intends to commit a little highway robbery in the meantime.

These are the problems, but both bills offer a wide array of improvements to the federal income tax system.

More than 6 million working poor would be taken off the income tax rolls, which should ease the burden on government programs to aid the poor. Some rich investors and profitable companies making big use of legal deductions would become taxpayers for the first time in years because of changes in tax shelters and a new minimum tax.

While many tax loopholes would remain in the form of ``transition rules,`` they are far less in number than current advantages given to investors and corporations.

The conference committee is expected to begin its work next month, and congressional leaders predict a bill will be ready for the president`s signature by Labor Day. With the many substantive issues of tax reform still in debate, it is too early to tell whether working men and women will have much to celebrate on that national holiday intended to pay homage to them.